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Posted By: Jessica Augustin | 29 Nov 2017

What Brexit Means for the Future of International Businesses

 

 

What is Brexit?

British Exit, abbreviated as “Brexit” refers to the United Kingdom’s (UK) decision to leave the European Union (EU). The decision was announced in a historic referendum on Thursday, June 23rd, 2016 with 51.9 percent of the vote for leave and 48.1 percent for remain. After the announcement, Prime Minister David Cameron who voted for Britain to remain in EU resigned and was replaced by Theresa May who is a strong“leave EU” campaigner pushingforEU free trades and for Britain to leave the EU’s single market and customs unions, reclaim control over immigration and put an end to the hegemony of EU laws. The unexpected result of the referendum shook the global market and Britain lost it AAA credit ratings with the Britain pound falling to its lowest against the dollar since 1985 by 11.1 percent. To prevent the UK from going into recession, the Bank of England had to cut interest rates for the first time in its history and take other emergency approaches.

 

Result from Brexit Referendum

 

The process to leave the EU started officially in March this year when Article 50 of the Lisbon Treaty was activated by Theresa May – a timer on the two years (March 2019) of formal negotiations.Brexit is a major historic event that will change Britain and EU forever and there is enduring uncertainty over future events once Britain leaves the EU, because it needs to make new trade agreements with the rest of the world.The EU, however, has refused to talk trade until Britain agrees that it owes the EU more money than it has already decided to pay.

‘Leave’ voters base their reason for Brexit on various considerations, like the European debt crisis, immigration, terrorism and the seemingstrain of Brussels’ bureaucracy on the economy of Britain. ‘Remain’ voters also cite their reason against Brexit based on one, the benefits of the EU’s “four freedoms” on both the economy and the society, that is, the unrestricted trade and movement of goods, services, investment and people across borders. Another reason is the risk associated with not being part of the EU’s decision-making process, considering that it is the hugestterminus by far for UK trades. A mutual drift in both disagreements is that leaving the EU would weaken the UK economy in the short run and make the country poorer in the long run. However, until the exit agreement is completed or the limit set for Brexit talks by Article 50 is reached, the UK will remain in the EU, and benefit from its trade connections and be subject to its rules and guidelines.

 

Events so far on businesses as a result of Brexit.

UK businesses are worried about how quickly they will know if any changes are set to happen due to Brexit, as it can take at least 1 year to set up a contingency plan.Businesses in the UK that import raw materials from the EU country are uncertain as to how much Brexit will impact their business as well as just how high the increased price of supplies will go. More than half (57 percent) of UK businesses are coming up with contingency plans related to Brexit and, according to an assessment carried out by the Institute of Directors, 11 percent have started executing these plans, but some businesses will have to prepare way ahead and not wait until after December 2017 (at the promptest) to be clear about the structure of Britain and EU future deal.

The ‘Remain’ voters worry that with ‘hard’ Brexit, companies will be less inclined to invest in the UK and possibly move their headquarters – Big investment banks like Goldman Sachs, JP Morgan, and Morgan Stanley said they will relocate jobs to the Continent in the coming years to ease risks and HSBC reported that some of its major clients already asked for trades to be directed through offices in mainland Europe, to ensure business endures irrespective of the result of Britain and EU negotiations. But the ‘Leave’ voters claim that EU countries have every incentive to continue trading with Britain, which is a big importer of goods and services.

Even so, the fall of pounds, in some cases produced bargains from non-European countries like the Japanese internet conglomerate, Softbank, buying ARM Holdings, a UK designer of semiconductors, Qatar Airways increasing its stake in British Airways, and AMC Entertainment, a Chinese company, buying a cinema chain in the UK.

 

The future of Brexit and how its effect on International businesses

Brexit will significantly upset the UK’s ability to do business with other international associates. It could trigger a decline in American and other overseas businesses in the UK because of the fear of unfair trade agreements and the uncertainty of Europe’s economy.This uncertainty will have the US and other overseas businesses doubt the viability of doing business with the UK and could also affect trade with the entire Europe based on the assumption that if the UK can leave EU, other countries can form their own ‘Brexit’ and leave too. There is also the anxiety that Ireland and Scotland may look to separate from the UK and join the EU as independent countries, considering that they had voted to remain in the EU.

The UK is one of the best countries to start a business, but all this could change because of the unknown outcomes of Brexit. A country that is politically unbalanced is ‘no flight zone’ when it comes to investing. A survey contracted by Woodford Investment Management in 2016 explained that it is very likely a satisfactory and mutually benefiting trade agreement would be achieved after Brexit. It also explained that negotiations between the UK and Non-European Union countries may be simpler and quicker than it used to be through the EU.However, the declining value of the pound, coupled with the uncertainty around Britain’s future trading relationships, also throw some transactions into doubt, at least temporarily.With all these uncertainties and fears, it has been anticipated that international trade due to Brexit will decline, even if Britain negotiates a number of free-trade agreements.

 

 

Contributed by:

Nelly Ebegbony

(Marketing & Research Assistant-ADAM Global)

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